Analysis Of Factors Affecting Corporate Financial Distress Based On Interpretative Structural Model And Cart Decision Tree

Enterprises as one of China’s three major macroeconomic entities，its survivaland development are affected by both international and domestic sides. America’s"subprime crisis", slowed down the pace of world’s economic developmentsignificantly, European debt crisis which derived from the Greek debt crisis make theworld’s major financial markets turbulent. With the rapid development of China’seconomy, the domestic competition is fierce. The company’s survival anddevelopment are more difficult. Therefore, we always observed the dynamic ofcompany from the company’s financial situation, contributed to the warning on thefinancial difficulties of the enterprise. This is not only conducive to the company’smanagers, employees, creditors, investors, government and related parties, but alsogood for the country’s economic development.This article starting from two angles, first established the InterpretativeStructural Model, which is the qualitative analysis; we obtain the long-term andshort-term indicators which affect the company’s financial position. Then use theCART’s idea of the classification of binary tree, we obtained CART tree and the set ofclassification rules, that is the critical value of financial ratios which companiesshould be wary of, it is the results of quantitative analysis after qualitative analysis.This paper is organized as follows.Chapter1introduces the research background of this paper, the significance ofthe topic and the research framework.Chapter2is literature review. First it introduces the definition of corporatefinancial distress which defined by the domestic and foreign scholars. Combining the definitions of domestic and foreign scholars, this paper treats the listed companywhich is continuous loss for two years as well as is special treated as a sign of thiscorporation fall in financial trouble. Second, it describes the method of researchingthe financial difficulties of the enterprise which used at home and abroad. Myresearch method is different from the former, I have integrated into the idea ofsystems engineering as well as the idea of CART classification binary tree. Finallythis paper introduces the relationship between the corporate capital structure andcorporate financial condition briefly, this article doesn’t simply introduce the capitalstructure indicators that can be seen in the financial statements, we introduce thefinancial Indicators that reflect the capital structure is the fixed assets ratio and equitymultiplier.Chapter3is the model design, this chapter first describes the research methodsused when establishing model: Panel data unit root test, cointegration test, Grangercausality test and systems engineering method used when creating interpretivestructural model; The CART algorithm when establishing CART tree. Then wedescribe the selection of the sample data and variables required when building models.In this paper the samples and variables required when constructing two models aresomewhat different, taking the validity and accuracy of the results in consideration, Iintroduce respectively.Chapter4is the empirical studies of financial distress prediction. Firstestablishing interpretive structural model, we have chosen15indicators in200samples from2001to2010.Second is the establishment of the CART classificationtree model, this process is more easily achieved using Clementine.The main conclusions obtained in this study are:Firstly，we conduct unit root test, cointegration test and Granger causality test offinancial data from2001to2010of200listed companies which contains15financialindicators. We know that the corporate financial position is reflected in a lot of financial ratios, and there is some intrinsic link among financial ratios, that is theremay be at least a causal relationship in one direction. Therefore, observing thefinancial position, we can not look at an index individually.Secondly, we obtain from the established interpretation structural model. Fromthe long-term and fundamental terms, that are the third layer of interpretationstructural model, a listed company’s financial position depends on a company’scurrent ratio and earnings per share growth. From the short-term and direct terms, thatare the first layer of interpretation structural model, a listed company’s financialposition depends on net profit margin, net profit growth, asset-liability ratio andequity multiplier. But we see from the second layer of interpretative structural modelthat is the middle layer, there are many financial ratios are the middle influencingfactors which directly impact the three short-term factors above.Thirdly, the classification index inside the set of rules obtained by the CARTmodel all intermediate factors, these results are relative to those of interpretationstructural model.So, to the current ratio and earnings per share growth of the enterprise as afundamental, the strategy we propose to deal with corporate financial distress isimproving the financial situation of enterprises from the middle financial indicatorsbased on fundamental factors.